Domestic investors fared better in Sensex dream run as rupee fell

A weak rupee has wiped out nearly half of global investors' gains, leaving foreign funds waiting for a currency rebound to revive returns

Indian and foreign investors have had different experiences in earning returns from the same market. 

An investor in the BSE Sensex would have made 16,000 per cent returns since 1986 when the index was launched. The returns since the turn of the millennium would be 2,500 per cent but not necessarily for foreign investors. The rupee’s depreciation would have taken away nearly half the gains. Returns for dollar-denominated investors (as seen in the Dollex-30) would be around 1,300 per cent since 2001. Recent experience is no different. 

The rupee-denominated BSE Sensex has doubled since 2019; the Dollex-30 is up 1.6 times. The rupee recently touched a record low of more than 90 against the dollar. 

Indian markets have over the long term seen currency depreciation of around 3 per cent, said Amnish Aggarwal, director of research (institutional equities) at PL Capital. This can weigh on foreign flows when returns are not significantly higher than in developed markets. Factors like the interest rate differential between India and the United States (US) have been closely watched amid recent volatility in allocations by foreign portfolio investors. 

Lower differential with US yields makes India less attractive as a destination for foreign investors who can get similar returns from developed market assets, said market analyst Anand Tandon. “A weaker rupee hurts everyone who has invested,” he said. 

The current record lows of the rupee do not mean that more downside is unlikely, according to Tandon. “You can assume that we can erode at the rate of 3-4 per cent a year." 

Mean reversion may help markets in the immediate future. Extended foreign outflows and market underperformance may reverse in the near term and could result in outperformance over the next 6-8 months, he said. 

Foreign portfolio investors have been net sellers by around ₹1.6 trillion (around $17.7 billion) in 2025 and domestic institutional investor (DII) inflows have helped keep markets buoyant. Additional liquidity could help valuations, according to the ‘Equity Strategy – India’ report by BofA Securities, which is part of the Bank of America group. 

“With steady momentum in DII inflows (average of $5-6 billion/month) offset partially by primary fundraises and likely muted FII (foreign institutional investor) outflows, we expect $46 billion of liquidity in the secondary market next year. We believe, this could give valuation support,” said the report authored by analysts Amish Shah, Udit Dhekale, Manya Kakkar and Rithik Dhiman. 

The analysts highlighted risks around a widening current account gap driven by fluctuating crude oil prices, lower exports over a delayed US trade deal and continued foreign outflows despite the government being careful about its fiscal deficit target. 

“...lower tax collections, higher subsidies could result in fiscal slippages again hurting rupee. Continued foreign outflows on further depreciation in rupee from here on out could tighten domestic liquidity conditions and...(temper)...the pace of economic recovery,” said the report. Meanwhile, earnings revival and under-positioning by foreign investors were among reasons that caused financial services firm Goldman Sachs to upgrade India to an overweight position in its November 7 Portfolio Strategy report by Sunil Koul, Timothy Moe, Amorita Goel and Kamakshya Trivedi.